Year-End Planning in a Bear Market
By: Cameron Diehl, CFP®
Friends – This is my sixth annual year-end planning checklist, and after one of the most difficult stretches for markets in recent memory, I would argue this year is more important than ever. Persistent inflation and rapidly rising interest rates have punished stock and bond markets this year, but they’ve also presented significant opportunities for thoughtful planning.
There’s a lot to cover this year, so I’ll get right into it - but I want to be as clear as possible: if you are not having these conversations you are potentially missing significant, timely opportunities. If you are unsure about any of these topics in any way, please do not hesitate to reach out. I’m always happy to help.
- Harvest Tax Losses and Rebalance – Down markets are never fun, but the ability to harvest unrealized losses, offset taxes and rebalance tax efficiently is significant and should not be missed.
- Take Advantage of Higher Interest Rates – The bright side of higher interest rates is the ability to earn more on your cash / savings and bonds now look like a very attractive investment option for the first time in many years. Series I Savings Bonds remain a great option for savers. Make sure you’re getting the best return on your cash and properly diversifying your portfolio.
- Contribute MORE to 401(k)s, IRAs and other retirement accounts – As always, maximizing contributions to these accounts can reduce your taxable income and give your retirement savings a boost. The contribution limits for these accounts are indexed to inflation, which means after some of the highest inflation in decades, we’re also getting some of the largest increases to how much you can contribute – up to $22,500 to 401(k)s or $30,000 if you’re 50 or older in 2023. Limits for IRAs, HSAs and other important accounts are similarly higher in 2023.
- Take advantage of Health Savings Accounts (HSAs) – HSAs continue to grow in popularity and are still the best deal going to save and invest. You can read more about HSAs in one of my previous blog posts.
- Plan for a Bonus – If you receive a portion of your compensation as a year-end bonus or have another lump sum to invest, review my previous post with tips on how to best allocate it.
- Revisit Roth Conversion Opportunities – If you’ve considered converting to a Roth IRA for any number of reasons, doing so at depreciated levels during a market pullback may prove advantageous. Backdoor Roth conversions also remain a good strategy. These decisions have complicated tax implications, so be sure to seek qualified advice before doing so.
- Assess Your Tax Efficiency – If you own mutual funds in taxable accounts, it is likely you’ll still receive some type of year-end capital gain distributions that you owe taxes on, even though markets are down – this can be avoided in the future. Not all investments are created equal in this regard and a careful review may identify opportunities to save on taxes going forward. I’ve written about assessing your portfolio’s overall tax efficiency previously.
- Anticipate LOWER Taxes – Another silver lining of high inflation is the income thresholds for federal tax brackets will increase roughly 7% - meaning more of your income will fall into lower tax brackets, potentially reducing your effective tax rate.
- Budget for Changes to Social Security & Medicare – One more positive of high inflation, the Social Security Administration recently announced the highest cost of living adjustment in 40 years – an 8.7% increase for 2023. As an added bonus for retirees, Medicare Part B premiums will actually DECREASE slightly in 2023.
- Take Required Minimum Distributions (RMDs) – If applicable, don’t forget to take required distributions from retirement accounts to avoid up to a 50% penalty on undistributed amounts.
- Give Thoughtfully – I’ve written about this topic in more depth in previous years. If you’re making any gifts in the near future, please review my tips on tax-efficient giving.
- Look Ahead to Future Years – The complexity involved with tax planning means it is no longer something that can be done one year at a time. Planning should now take a longer-term perspective and be thoughtfully coordinated over multiple tax years, whether through accelerating or deferring income, “bunching” deductions or other strategies.
